CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

27.4 CONCLUSION

This chapter presented an overview of macroeconomic influences on commodity prices and has provided empirical evidence for the relationship between commodity prices and inflation, monetary policy, exchange rate movements, and the business cycle. Although commodities are a very heterogeneous asset class, some effects apply to all indices: Most commodities exhibit an inflation hedging property when compared with U.S. inflation. For European and Asian inflation, and when considering different time horizons, the inflation hedging property becomes more ambiguous, so the general effect is unclear. Closely linked to inflation are the changes in the real interest rate. An increase in the real interest rate decreases real commodity prices, with a lag of two or more quarters as investors react to increasing opportunity costs and shift part of their financial capital out of commodities. Exchange rate movements can have considerable effects on the supply of and demand for commodities, since most commodities are denominated in U.S. dollars. A general depreciation of the dollar increases commodity prices, as export countries demand higher prices in order to compensate for the exchange rate loss. Changes in the return patterns of commodities over time are reflected in different phases of the business cycle. In a period of economic expansion, the demand for commodities increases. At the same time, the central bank is likely to raise real interest rates, which decreases the demand ...